Shame? If we've learned anything over the last year, it's that Wall Street has none. Eight months ago Wall Street lobbyist beat back a proposal to give bankruptcy judges the right to amend mortgages in order to pressure lenders to reduce principle owed, just like Wall Street lobbyists are now beating back tough regulations to prevent the Street from causing another meltdown. Goldman Sachs, attempting to preempt a firestorm of public outrage when it dispenses its $17 billion of bonuses, is setting up a crudely conceived $500 million PR program to help Main Street.

Shame won't work. Only political muscle and courage will.

Moreover, Dean Baker points out that modifying mortgages will help the too big to fails a lot more than the homeowners themselves.

The big talk in Washington these days is "helping homeowners". Unfortunately, what passes for help to homeowners in the capitol might look more like handing out money to banks anywhere else...

It is extremely unlikely that the vast majority of underwater homeowners will ever accumulate a penny in equity. Keeping them in their homes as owners means wasting thousands of dollars a year on excess housing costs only to be forced to arrange a short sale or face a foreclosure at some future point in time.

So, who benefits from "helping homeowners" in this story? Naturally the big beneficiaries are the banks. If the government pays for a mortgage modification where the homeowner is still paying more for the mortgage than they would for rent, then the bank gets a big gift from the government, but the homeowner is still coming out behind.

In some cases the government may pay enough to buy down principle that the homeowner is no longer underwater, but the bulk of this money is a gift to the bank, not the homeowner. If a homeowner is $100,000 underwater and the government pays the bank $50,000 to write the loan down to the current value of the house, then the bank has pocketed $50,000, while the homeowner is essentially left breaking even. This is very generous to the bank, but homeowners have nothing to show in this story.

President Obama has proposed putting up $70bn to help homeowners in this way. This help for homeowners is likely to end up as a larger subsidy to the banks than the rest of the troubled asset relief programme (Tarp). The reason is that the rest of the Tarp programme was a loan. The loans were at below market interest rates - thereby providing a subsidy to the banks - but most of the money is getting paid back.

The original batch of lending to banks was $250bn. Even if we assume an average interest rate subsidy of 10 percentage points (a very large subsidy), this still implies that the lending portion of Tarp only handed $25 billion to the banks, far less than the $70 billion that we are prepared to hand them under the guise of helping homeowners.

There are simple, low-cost ways to help homeowners who were victims of the housing bubble and lending sharks. The most obvious way would be to give homeowner the right to rent their home at the market price for the next decade. But this would mean hurting the banks rather than giving them taxpayer dollars, and we still don't talk about hurting banks in Washington DC.

Maybe that's why a professor of law advises that underwater homeowners walk away from their mortgages, saying that it is not immoral to do so, Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced, and portfolio manager and investment advisor Marshall Auerback argues that a debtor's revolt would be a good thing.

First, as Harvey Wasserman notes, continuing the wars in Afghanistan and Iraq will more than wipe out any reduction in carbon from the government's proposed climate measures. Writing about the escalation in the Afghanistan war, Wasserman says:

The war would also come with a carbon burst. How will the massive emissions created by 100,000-plus soldiers in wartime be counted in the 17% reduction rubric? Will the HumVees be converted to hybrids? What is the carbon impact of Predator bombs that destroy Afghan families and villages?

The continuance of the Afghanistan and Iraq wars completely and thoroughly undermines the government's claims that there is a global warming emergency and that reducing carbon output through cap and trade is needed to save the planet.

I can't take anything the government says about carbon footprints seriously until the government ends the unnecessary wars in Afghanistan and Iraq. For evidence that the Iraq war is unnecessary, see this. Read this for evidence that the U.S. could have taken Bin Laden out years ago and avoided a decades long war in Afghanistan. And for proof that the entire war on Muslim extremists is unnecessary for our national security, see this.

Our bailout buddies over at Goldman Sachs, JP Morgan, Morgan Stanley, Citigroup and the other Wall Street behemoths are buying heavily into carbon trading (see this, this, this, this, this and this). As University of Maryland professor economics professor and former Chief Economist at the U.S. International Trade Commission Peter Morici writes:

Obama must ensure that the banks use the trillions of dollars in federal bailout assistance to renegotiate mortgages and make new loans to worthy homebuyers and businesses. Obama must make certain that banks do not continue to squander federal largess by padding executive bonuses, acquiring other banks and pursuing new high-return, high-risk lines of businesses in merger activity, carbon trading and complex derivatives. Industry leaders like Citigroup have announced plans to move in those directions. Many of these bankers enjoyed influence in and contributed generously to the Obama campaign. Now it remains to be seen if a President Obama can stand up to these same bankers and persuade or compel them to act responsibly.

In other words, the same companies that made billions off of derivatives and other scams and are now getting bailed out on your dime are going to make billions from carbon trading.

Consensus

Everyone should read the leaked emails and rationally think through what they mean. But whatever one believes about climategate (the leaked emails showing that "tricks" were used to "hide the decline" in the climate data and the destruction of the original source data), we should all be able to agree that:

(1) We should end the wars in Afghanistan and Iraq; and

(2) We should not let the financial giants who caused the financial crisis to profit off of cap and trade schemes.

In response to my essays documenting that war is harmful to the American economy and produces a huge carbon footprint, some commentators have argued that the Afghanistan and Iraq wars are necessary to combat Muslim extremists.

Even putting aside the fact that Saddam was an atheist who hated Muslims, the argument holds no credibility.

"Terrorists should be perceived and described as criminals, not holy warriors, and our analysis suggests that there is no battlefield solution to terrorism."

And key war on terror architect Douglas Feith has now confirmed Donald Rumsfeld, Paul Wolfowitz and Wesley Clark in admitting that the so-called War on Terror is a hoax.

In fact, starting right after 9/11 -- at the latest -- the goal has always been to create "regime change" and instability in Iraq, Iran, Syria, Libya, Sudan, Somalia and Lebanon so as to protect Israel. And the goal was never really to destroy Al Qaeda.

Three weeks after the September 11, 2001, terror attacks, former US defense secretary Donald Rumsfeld established an official military objective of not only removing the Saddam Hussein regime by force but overturning the regime in Iran, as well as in Syria and four other countries in the Middle East, according to a document quoted extensively in then-under secretary of defense for policy Douglas Feith's recently published account of the Iraq war decisions. Feith's account further indicates that this aggressive aim of remaking the map of the Middle East by military force and the threat of force was supported explicitly by the country's top military leaders.

Feith's book, War and Decision, released last month, provides excerpts of the paper Rumsfeld sent to President George W Bush on September 30, 2001, calling for the administration to focus not on taking down Osama bin Laden's al-Qaeda network but on the aim of establishing "new regimes" in a series of states...

***

General Wesley Clark, who commanded the North Atlantic Treaty Organization bombing campaign in the Kosovo war, recalls in his 2003 book Winning Modern Wars being told by a friend in the Pentagon in November 2001 that the list of states that Rumsfeld and deputy secretary of defense Paul Wolfowitz wanted to take down included Iraq, Iran, Syria, Libya, Sudan and Somalia [and Lebanon].

***

When this writer asked Feith . . . which of the six regimes on the Clark list were included in the Rumsfeld paper, he replied, "All of them."

***

The Defense Department guidance document made it clear that US military aims in regard to those states would go well beyond any ties to terrorism. The document said the Defense Department would also seek to isolate and weaken those states and to "disrupt, damage or destroy" their military capacities - not necessarily limited to weapons of mass destruction (WMD).

Where does Israel come in?

Well, the Asia Times article continues:

Rumsfeld's paper was given to the White House only two weeks after Bush had approved a US military operation in Afghanistan directed against bin Laden and the Taliban regime. Despite that decision, Rumsfeld's proposal called explicitly for postponing indefinitely US airstrikes and the use of ground forces in support of the anti-Taliban Northern Alliance in order to try to catch bin Laden.

Instead, the Rumsfeld paper argued that the US should target states that had supported anti-Israel forces such as Hezbollah and Hamas.

***

After the bombing of two US embassies in East Africa [in 1988] by al-Qaeda operatives, State Department counter-terrorism official Michael Sheehan proposed supporting the anti-Taliban Northern Alliance in Afghanistan against bin Laden's sponsor, the Taliban regime. However, senior US military leaders "refused to consider it", according to a 2004 account by Richard H Shultz, Junior, a military specialist at Tufts University.

A senior officer on the Joint Staff told State Department counter-terrorism director Sheehan he had heard terrorist strikes characterized more than once by colleagues as a "small price to pay for being a superpower".

Even Newsweek has now admitted that the war on terror is wholly unnecessary.

Sunday, November 29, 2009

Among the most prophetic voices prior to the economic crash was UCLA economics professor Harold H. Somers, who warned in 1991 that revisions to the tax code would increase leverage, which could lead to economic disaster:

The result is to tilt the well-worn playing field even more in favor of leveraging, leading to the possibility of another leverage frenzy and debacle at some time in the future.

Professor Sommers explained:

The complete history of the causes of the junk bond debacle of 1989 and 1990 is yet to be written. But the tax incentive must have a prominent place in any comprehensive work. This comment applies to long-term debt where the interest deduction can be a major factor; short-term debt may be dominated by other considerations.

What is involved is essentially the shield against income tax that is provided by corporate debt compared with the shields that are provided for equity by the income tax rules ...

Former President of the St. Louis Federal reserve Bank - William Poole - agrees in a new paper:

A straightforward fix for excessive leverage can be achieved through the tax system. Companies borrow, in part, because they believe that debt capital is cheaper than equity capital. That is certainly the case under the U.S. corporate tax system because interest is a deductible business expense in calculating income subject to tax whereas dividends are not deductible.

Excessive leverage is highly destabilizing to the financial system (see this, for example). If a simple fix to the tax code could substantially reduce leverage, I'm all for it.

Poole recommends the gradual phasing-in of changes to the tax code to reduce leverage:

Interest deductibility could be phased out over the next 10 years. Next year, 90 percent of interest would be deductible; the following year, 80 percent would be deductible, and so forth, until interest would no longer be deductible at all. The same reform would apply to all business entities; partnerships, for example, should not be able to deduct interest if corporations cannot.

With this simple change, the federal government would encourage businesses and households to become less leveraged. We have learned that leverage makes not only individual companies more vulnerable to failure but also the economy less stable. We use tax laws all the time to promote socially desirable behavior; eliminating the deductibility of interest would reduce the risk of failure of large companies—especially, large firms—and thereby reduce the collateral damage inflicted by such failures.

You've heard that - according to the U.S. Senate - Bin Laden was "within the grasp" of the U.S. military in Afghanistan in December 2001, but that then-secretary of defense Rumsfeld refused to provide the soldiers necessary to capture him.

This is not news: it was disclosed in 2005 by the CIA field commander for the area in Afghanistan where Bin Laden was holed up.

In addition, French soldiers allegedly say that they easily could have captured or killed Bin Laden in Afghanistan, but that the American commanders stopped them.

And the oldest - and second-largest - French newspaper claims that CIA agents met with Bin Laden two months before 9/11, when he was already wanted for the bombing of the U.S.S. Cole.

At that point, it should have been obvious to the American and allied intelligence services that Bin Laden was involved in planning 9/11:

The National Security Agency and the FBI were each independently listening in on the phone calls between the supposed mastermind of the attacks and the lead hijacker. Indeed, the FBI built its own antenna in Madagascar specifically to listen in on the mastermind's phone calls

The day before 9/11, the mastermind told the lead hijacker "tomorrow is zero hour" and gave final approval for the attacks. The NSA intercepted the message that day and the FBI was likely also monitoring the mastermind's phone calls

Indeed, two days before 9/11, Bin Laden called his stepmother and told her "In two days, you're going to hear big news and you're not going to hear from me for a while.” U.S. officials later told CNN that “in recent years they've been able to monitor some of bin Laden's telephone communications with his [step]mother. Bin Laden at the time was using a satellite telephone, and the signals were intercepted and sometimes recorded." Indeed, before 9/11, to impress important visitors, NSA analysts would occasionally play audio tapes of bin Laden talking to his stepmother.

And according to CBS News, at 9:53 a.m on 9/11, just 15 minutes after the hijacked plane had hit the Pentagon, "the National Security Agency, which monitors communications worldwide, intercepted a phone call from one of Osama bin Laden's operatives in Afghanistan to a phone number in the former Soviet Republic of Georgia", and secretary of Defense Rumsfeld learned about the intercepted phone call in real-time (if the NSA monitored and transcribed phone calls in real-time on 9/11, that implies that it did so in the months leading up to 9/11 as well)

But even ignoring everything that happened in and before 2001, there are still unanswered questions. Specifically, a retired Colonel and Fox News military analyst said that the U.S. could have killed Bin Laden in 2007, but didn't:

We know, with a 70 percent level of certainty — which is huge in the world of intelligence — that in August of 2007, bin Laden was in a convoy headed south from Tora Bora. We had his butt, on camera, on satellite. We were listening to his conversations. We had the world’s best hunters/killers — Seal Team 6 — nearby. We had the world class Joint Special Operations Command (JSOC) coordinating with the CIA and other agencies. We had unmanned drones overhead with missiles on their wings; we had the best Air Force on the planet, begging to drop one on the terrorist. We had him in our sights; we had done it ....Unbelievably, and in my opinion, criminally, we did not kill Usama bin Laden.

Indeed, a United States Congressman claims that the Bush administration intentionally let Bin Laden escape in order to justify the Iraq war.

On Friday, I provided some specifics about who had loaned Dubai money, and the potential fallout from Dubai's debt crisis.

But I just found another interesting tidbit.

Specifically, 7 Days - one of the largest papers in Dubai - wrote in March:

The US public will be “outraged” by Citibank’s $8 billion loan to Dubai just six weeks after the bank was bailed out, US House of Representatives domestic policy subcommittee chair-man has said. Dennis Kucinich commented on the Dubai loan and other US banking investments as a congressional panel released a report that strongly questioned Citibank’s actions. The report, shown to 7DAYS, cites the Dubai loan as the largest of the “questionable transactions” by banks after the US government bailed them out. It notes that the loan to Dubai’s public sector came on December 14, just six weeks after the US government gave Citibank a $25 billion bail-out.

The report quotes Win Bischoof, then chairman of Citi, as saying the bank agreed to the Dubai loan because “we continue to place the Gulf region among our globally most significant markets”. The report also questions JP Morgan’s $1 billion investment in India and Bank of America’s $7 billion investment in China. “When the American people find that their tax dollars, which were supposed to be used to get us out of this financial crisis, are instead being used to ship jobs and investments overseas, there will be outrage,” Kucinich said. The report notes the loans were not illegal and that it is not known if they were directly funded by bail-out funds. A Citibank official was quoted at the time as saying the $8 billion came from the bank’s own funds and third party sources. The report was released as the committee prepares to question banking chiefs about their use of bail-out funds.

Will Citi be repaid in full on its $8 Billion loan, which apparently came out taxpayer bailout money?

Hundreds of billions of dollars worth of building projects were delayed or cancelled. Thousands of jobs disappeared.

Dubai, playground of the über-extravagant, suddenly found itself facing the very real possibility that its biggest state-owned company, Dubai World, could go into bankruptcy. It warned it was having trouble making debt payments on $59 billion US — money borrowed to pay for all the excess.

Global Impact

The CBC also notes that Dubai World has holdings worldwide:

Dubai World is Dubai's main holding and investment enterprise, but its holdings range far beyond the Persian Gulf area ...

Another Dubai World holding — DP World — operates Centerm, a container terminal in Vancouver's inner harbour. DP World acquired the terminal when it bought the marine terminal assets of P&O Ports in 2006, and plans to spend $140 million to expand it.

That purchase also gave it ownership of many key U.S. ports — something that raised national security concerns in the U.S. Some American legislators didn't like the idea that U.S. ports would be controlled by Middle Eastern state-owned enterprises. DP World subsequently sold its U.S. port assets.

In Britain, another Dubai World subsidiary, Leisurecorp, bought the Turnberry Resort in Scotland in 2008 — home to the 2009 British Open — for more than 50 million pounds.

In the U.S., Dubai World's investment arm, Istithmar World, bought the luxury retailer Barneys New York in 2007 for almost $1 billion US. There were reports earlier this year it was trying to unload the retailer as the luxury market unwound and Istithmar racked up big losses from the global financial meltdown, but Dubai World's chair denied it.

In addition, Bloomberg notes that India might be effected by Dubai's economic problems:

About 4.5 million Indians live and work in the Gulf region and remit more than $10 billion annually, according to government data. The turmoil may affect remittances, said Thomas Issac, finance minister of the southern state of Kerala, which accounted for about a quarter India’s migrant labor in 2005...

Remittances from the Middle East account for about 25 percent of Kerala’s economy, Issac said

The Royal Bank of Scotland is Dubai's biggest creditor, with $2.3 billion, or 17 percent, of Dubai World loans since January 2007. HSBC, Europe’s biggest bank, has the “largest absolute exposure” in the U.A.E. with $17 billion of loans in 2008

I got a message from someone who was on the conference call [with Dubai government officials]... Some European banks may be on the wrong side of this trade. As readers may know, EuroBanks went into the crisis with even lower capital levels than their US counterparts, and have taken fewer writedowns of their dodgy exposures:

The standstill announcement…was a massive surprise. One could sense the panic in those asking questions….this could be the turning point in spreads and could be viewed similar to the Russian debt crisis in 1998 or the Bear situation in 2007…based on companies and the accents of the people asking questions, it is obvious European institutions will be hit hard…Dubai made this announcement at the beginning of a four day holiday, so there will be little news until next week…There is another wave of pain out there. This information does not seem to be making its way to other markets. It will.

Zero Hedge has a good roundup of statistics regarding the biggest creditors of the United Arab Emirates, of which Dubai is a part:

“We’re bound to see a rise in risk aversion,” Arnab Das, the London-based head of market research and strategy at Roubini Global Economics said in an interview. “The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear.”

UBS speculates that (among other possibilities) $80-90 billion (which is already over 100% of GDP) may be a low figure for Dubai's debt and that significant "off-balance sheet" amounts might explain the restructuring attempt

The Dubai government is on holiday (Eid Al-Adha) until December 6th

Abu Dhabi's Sovereign Wealth Fund (generally thought to command upwards of $500 billion) may have significantly less available. (Rumors of $125 billion in 2008 losses abounded last year). Bloomberg quotes sources to the effect that Abu Dhabi SWF's AUM has been "overstated, sometimes by as much as 100 percent."

British prime minister Gordon Brown has indicated how serious the situation is:

"Clearly the restructuring announcement has caused disruption and uncertainty in world markets,” Brown’s spokeswoman Vickie Sheriff told reporters in London. Brown’s “view is that U.K. banks are well capitalized having undergone rigorous stress testing,” she said.

And the Associated Press is asking whether Dubai's default will cause another financial panic.

The numbers involved are not that great for most creditors - on the order of hundreds of millions of dollars.

But the sense of shock and loss of confidence - when many had optimistically believed that the world economy was out of the woods - could indeed be profound.

For example, Tony Blair - the British Prime Minister - knew that Saddam possessed no WMDs. If America's closest ally Britain knew, then the White House knew as well.

And the number 2 Democrat in the Senate -who was on the Senate intelligence committee - admitted that the Senate intelligence committee knew before the war started that Bush's public statements about Iraqi WMDs were false. If the committee knew, then the White House knew as well.

But we don't even have to use logic to be able to conclude that the White House knew.

Specifically, the former highest-ranking CIA officer in Europe says that Bush, Cheney and Rice were personally informed that Iraq had no WMDs in Fall 2002 (and see this).

Former Treasury Secretary O’Neil - who was a member of the National Security Council - said:

In the 23 months I was there, I never saw anything that I would characterize as evidence of weapons of mass destruction.

Indeed, a former high-level CIA analyst (who chaired National Intelligence Estimates and personally delivered intelligence briefings to Presidents Ronald Reagan and George H.W. Bush, their Vice Presidents, Secretaries of State, the Joint Chiefs of Staff, and many other senior government officials) says that falsified documents which were meant to show that Iraq's Saddam Hussein regime had been trying to procure yellowcake uranium from Niger can be traced back to Dick Cheney, and that:

CIA Director George Tenet told his "coterie of malleable managers" at the CIA to create a National Intelligence Estimate "to the terms of reference of Dick Cheney's speech of August 26, 2002, where Dick Cheney said for the first time Saddam Hussein could have a nuclear weapon in a year, he's got all kinds of chemical, he's got all kinds of biological weapons."

Bush administration had information from a top Iraqi intelligence official "that there were no weapons of mass destruction in Iraq – intelligence they received in plenty of time to stop an invasion."

The Washington Post reports that a secret, fact-finding team of scientists and engineers sponsored by the Pentagon determined in May 2003 that two small trailers captured by U.S. and Kurdish troops were not evidence of an Iraqi biological weapons program. The nine-member team “transmitted their unanimous findings to Washington in a field report on May 27, 2003.” Despite having authoritative evidence that the biological laboratories claim was false, the administration continued to repeat the myth over the next four months.

A British official said that “the intelligence and facts were being fixed around the policy”.

In January 2004, The Carnegie Endowment for International Peace report on WMDS in Iraq concluded that the evidence prior to the war indicated that Iraq’s nuclear program had been dismantled and its chemical weapons had lost most of their lethality. In addition, the report concluded that the administration “systematically misrepresented the threat from Iraq’s WMD and ballistic missile programs”.

Fool Me Once ...

In addition, it is a well-understood principle that if someone has been caught in a lie, we are less likely to believe him. For example, a witness who is caught in a lie during trial is unlikely to be believed by the jury when he makes another statement.

Well, Cheney and other high-level White House officials repeatedly implied that Saddam and Iraq had ties to Al Qaeda and 9/11, when they knew that wasn't true.

Indeed, Pulitzer prize-winning journalist Ron Suskind reports that the White House ordered the CIA to forge and backdate a document falsely linking Iraq with Muslim terrorists and 9/11 ... and that the CIA complied with those instructions and in fact created the forgery, which was then used to justify war against Iraq. And see this.

The government also spied on American citizens (even before 9/11 ... confirmed here and here), while saying "we don't spy".

And the government tortured prisoners in Iraq, but said "we don't torture".

In other words, high-level officials in the administration were caught in repeated untruths, and so their statements about believing good faith that Iraq had WMDs is less believable.

What Really Happened?

But if the White House knew that Iraq didn't have any WMDs, why did we go to war in Iraq?

Well, several very high-profile figures have said it was for the oil. See this, this, this. and this.

Tim Duy - Director of Undergraduate Studies of the Department of Economics at the University of Oregon and the Director of the Oregon Economic Forum - noticed an amazing sentence in the minutes of the most recent meeting of the Fed Open Market Committee:

Overall, many participants viewed the risks to their inflation outlooks over the next few quarters as being roughly balanced. Some saw the risks as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation. To keep inflation expectations anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.

Read that carefully and realize this: An apparently not insignificant portion of the FOMC believes that there is a terrible risk that banks loosen their credit standards and increase lending at a time when, even if the economy posts expected gain, unemployment remains at unacceptably high levels. Silly me, I thought increased lending was the whole point of the exercise to lower interest and expand the balance sheet. That whole credit channel thing. If not to expand lending during a credit crunch, then what else are they expecting?

I am in shock that this sentence made it into the minutes. One can only conclude that a significant portion of policymakers are simply clueless. Or, more disconcerting, they have lost all faith in the ability of financial institutions to channel capital into activities with any hope of financial returns. Has the Fed now embraced the view that they manage the economy through little else then fueling and extinguishing bubbles?

These statement is an indication of intellectual bankruptcy at the Fed, that they have learned nothing from the crisis. But that isn’t surprising. CEOs usually need to be fired after they have presided over a disaster. They are incapable of seeing and remedying their errors. Why should senior bureaucrats be any different?

And yet Obama, like Bush, has done virtually nothing to create more jobs. Instead, they both gave trillions to the biggest banks (who are not loaning it out to the little guy) and for waging wars in Afghanistan and Iraq.

Obama is apparently escalating - not ending - the wars. And its not cheap.

According to the White House, the cost of deploying new soldiers to Afghanistan could be $1 million per soldier. Nobel prize winning economist Joseph Stiglitz says that the Iraq war will cost $3-5 trillion dollars.

As I have previously pointed out, protracted war increases unemployment, shrinks the economy, and causes recession. See this, this and this.

But - you may say - we had no choice, we had to fight those wars because of 9/11.

Well, top British officials say that the U.S. discussed Iraq regime change long before 9/11. In fact, they say that regime change was advocated one month after Bush took office:

The chairman of the British Joint Intelligence Committee in 2001 told investigators Monday that elements of the Bush Administration were pushing for regime change in Iraq in early 2001, months before the 9/11 attacks and two years before President George W. Bush formally announced the Iraq war.

Sir Peter Ricketts, now-Secretary at the Foreign Office, said that US and British officials believed at the time that measures against Iraq were failing: "sanctions, an incentive to lift sanctions if Saddam allowed the United Weapons inspectors to return, and the 'no fly' zones over the north and south of the country."

Ricketts also said that US officials had raised the prospect of regime change in Iraq, asserting that the British weren't supportive of the idea at the time.

***

The head of the British Foreign Office's Middle East department, Sir William Patey, told the inquiry that his office was aware of regime change talk from some parts of the Bush Administration shortly after they took office in 2001.

"In February 2001 we were aware of these drum beats from Washington and internally we discussed it," Patey said. "Our policy was to stay away from that."

Former Treasury Secretary Paul O'Neill also says that Bush planned the Iraq war before 9/11.

Everyone knew the WMD claims were fake. For example, the number 2 Democrat in the Senate, who was on the Senate intelligence committee, admitted that the Senate intelligence committee knew before the war started that Bush's public statements about Iraqi WMDs were false. And if the committee knew, then the White House knew as well.

And Tony Blair - the British Prime Minister - knew that Saddam possessed no WMDs. If America's closest ally Britain knew, then the White House knew as well.

And you may have heard that the Energy Task Force chaired by Cheney prior to 9/11 collected maps of Iraqi oil fields and potential suitors for that oil. But you probably don't know that a secret document written by the National Security Council on February 3, 2001 directed the N.S.C. staff to cooperate fully with the Energy Task Force as it considered the “melding” of two seemingly unrelated areas of policy: “the review of operational policies towards rogue states,” such as Iraq, and “actions regarding the capture of new and existing oil and gas fields”.

In other words, it is difficult to brush off Cheney's Energy Task Force's examination of Iraqi oil maps as a harmless comparison of American energy policy with known oil reserves because the N.S.C. explicitly linked the Task Force, oil, and regime change. Indeed, a former senior director for Russian, Ukrainian, and Eurasian affairs at the N.S.C. said:

If this little group was discussing geostrategic plans for oil, it puts the issue of war in the context of the captains of the oil industry sitting down with Cheney and laying grand, global plans.

Cheney's role in getting the U.S. into unnecessary military confrontations is not new. According to former high-level intelligence officer Melvin Goodman, during the Ford administration, Cheney orchestrated phony intelligence for the Congress in order to get an endorsement for covert arms shipments to anti-government forces in Angola.

And in the 1970's, Cheney was instrumental in generating fake intelligence exaggerating the Soviet threat in order to undermine coexistence between the U.S. and Soviet Union, which conveniently justified huge amounts of cold war spending. See also this. This scheme foreshadowed Mr. Cheney's role in generating fake intelligence in Iraq by 30 years.

The government also apparently planned the Afghanistan war before 9/11 (see this and this).

But you don't even have to even think about all of the complex facts discussed above. It's really simple: when asked to specify exactly why we are still fighting in Iraq and Afghanistan, Obama cannot really explain why we are still there.

(It's also simple because the top bipartisan experts say that the Iraq war has increasedthe threat of terrorism. See this, this, this, this, this and this).

The Wars Are Unnecessary and Are Killing the Economy

Bottom line: The wars are unnecessary, and they are draining resources which could be used to reduce unemployment and help the economy.

Note: This is not a Republican versus Democratic issue. For example, Bill Clinton signed the Iraq Liberation Act in 1998, calling for regime change in Iraq. And Obama is escalating wars started by the previous administration.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means....There is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.

For more on issues regarding age demographics, benefits and the tension between young and old, see this and this.

The Times continues:

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later”...

The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security

The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money.

On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages...

The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.

Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels...

Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education...

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.

As Karl Denninger has repeatedly pointed out, we are on an unsustainable track guaranteed to lead to a debt crisis. Denninger posts the following chart to make his point:

Under any scenario, debt gets further and further ahead of GDP, and America slowly digs its own grave.

As the assets on the US balance sheet become increasingly long-dated, courtesy of QE, and locking in record low rates, US liabilities in turn have shortened their duration to a record level. Almost $3 trillion in US debt will have to be rolled by the end of 2010. If realistic inflation expectations are any indication, all hopes of getting comparable interest terms on these securities once refinancing time rolls around, will be promptly dashed (we are not saying inflation is inevitable, even with QE 2.0 around the corner). Yet for all who claim inflation is a good thing, the one security that will be hit the most and the fastest will be precisely the T-bill universe, once all the curve steepeners already in place unwind very, very quickly. The result would be a major spike in interest expense payments by the government. The chart below presents the historical annual interest expense on all USTs by year. 2009 will be the first year in which the interest expense alone will be over half a trillion dollars (Zero Hedge estimates).

The concern is that even as the US debt, which as of Friday was at $11,868,457,477,911.94, and looks like it will hit the $12.104 trillion limit within a few weeks, continues to skyrocket, the interest expense paid on holdings will continue creeping ever higher. Keep in mind, at September 30, the average interest rate on Bills was a historically low 0.347%, and Notes yielded a QE-facilitated 3.043%. With the Fed out, can China and US retail investors support this record low interest at a time when UST supply keeps coming and coming?

And as the Times points out, America is competing with other countries to sell debt:

The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.

Paul Krugman disagrees, believing that debt is a "phantom menace". But this is not because Krugman is a liberal. Government economists in the Reagan, Bush and Obama administrations have all believed pretty much the same thing: deficits don't matter.

But many experts disagree:

The St. Louis Federal Reserve Bank posted a paper entitled "Is The United States Bankrupt?". The paper provides the following answer: "The United States is going broke"

People seem to think the government has money," "said former U.S. Comptroller General David Walker. "The government doesn't have any money"

The United States Department of the Treasury and the Office of Management and Budget published a report stating that the U.S. cannot grow our way out of the government's liabilities, that the liabilities are quickly growing, and that failing to take drastic and immediate action would lead to very bad consequences (the report was written in 2006)

Ultimately, deleveraging requires the writing down of debt as reflationary policies are not a free lunch and won't solve the debt overhang problem (Dr. Roubini). Important case study: Japan back into deflationary territory despite huge public debt and QE (Chinn).

The International Monetary Fund - which oversees third-world economies - is so concerned about the solvency of the U.S. economy that, during the Bush administration, it started conducting a complete audit of the whole US financial system. The IMF previously only audited banana republics (then again ...)

Société Générale published a report titled "Worst-case debt scenario", in which the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems. "As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast. The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Aging populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said. The bank said the current crisis displays "compelling similarities" with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.

The American Enterprise Institute for Public Policy Research (AEI) published a paper indicating that “by all relevant debt indicators, the US fiscal scenario will soon approximate the economic scenario for countries on the verge of a sovereign debt default.”

Obama told Fox news that the United States' climbing national debt could drag the country into a double-dip recession

Of course, all it takes is a quick read of Minsky or Keen to see that massive debt overhangs drag economies down into the abyss.

Many officials and experts have warned of violence stemming from the economic crash.

The head of the International Monetary Fund, Dominique Strauss-Kahn, is now warning that there might be a revolution if some countries if governments hand out another round of bailouts to the financial sector:

The public will not bail out the financial services sector for a second time if another global crisis blows up in four or five years time, the managing-director of the International Monetary Fund warned this morning.

Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

"Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates.

Now, let's say you're at a talk given by a congressman. In response to a question, he says "the rumors are false. I have always paid my taxes".

With your Google Mobile App, you quietly speak the congressman's name and the phrase "paid taxes" into your iPhone, and you pull up numerous articles showing that he failed to pay taxes, and you catch him in his misstatement.

Or he misrepresents claims that he has consistently voted for tougher Wall Street regulations. You quietly speak a couple search words into the iPhone (such as the Congressman's name and the phrases "Wall Street" and regulations), and instantly pull up articles showing that he voted for key deregulation bills.

You can also pull up facts instantly. For example, if the chairman of the Federal Reserve misstates the amount of the deficit, you can pull up the correct figure and then say, "actually, the Congressional Budget Office says it is ..."

In other words, you can instantly fact-check any statement and do on-the-fly research anywhere you can get wireless access. This is a must-have for any reporter or citizen journalist.

There are probably similar applications which work on similar hand-held devices.

If you can't afford to buy a hand-held smart device such as the iPhone G3, see if you can borrow one for important events.

Saturday, November 21, 2009

In the case of WFC [Wells Fargo], the bank has taken the position that NONE of its conforming residential exposures should be brought on balance sheet despite the FASB rule change. As we discussed in The Institutional Risk Analyst this week, "Why? Because the loans inside these securitization vehicles are insured by FHA, so goes the thinking of WFC and its auditor, thus the bank has no liability to these entities or the securities they have issued to investors. Pretty neat trick, eh?"

Thus WFC is basically saying that none of the bank's $1.1 trillion in conforming OBS [off balance sheet] exposures need to be represented or reserved against.

A "conforming loan" is one that meets lending guidelines, including loan amounts as set by the government sponsored enterprises, such as Fannie as or Freddie.

As part of the 2008 stimulus bill, Congress temporarily increased the conforming amounts available through the FHA.

Bottom line: Wells Fargo is saying that since the FHA - that is, the government, that is, the taxpayers - will bail out Wells for loans that go bad, the giant bank doesn't have to reserve against these possible losses.

Yes, Wells is as bad as the other too big to fails. See this, this, this and this.

Friday, November 20, 2009

Some of Goldman Sach's biggest shareholders are demanding that executive compensation be reduced. As the Wall Street Journal notes:

Their complaints in private conversations with the company and at analyst meetings show how anger over its big-money culture is spilling into the ranks of investors who typically shy away from debates over Wall Street pay.

Protests

There were the protests outside of the Bankers Association meeting in Chicago. See this, this, this, this, this and this.

If you don't think that more - bigger - protests are coming, you haven't been paying attention.

Debtor's Revolt

Debtors are revolting against exorbitant interest rates and fees and other aggressive tactics by the too big to fail banks. See this, this, and this.

Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced. She says that - if the bank can't produce the mortgage papers - then the homeowner can stay in the house.

And even popular personal finance advisor Suze Orman is highlighting the debtors revolt phenomenon on her national tv show.

Congress Is Starting to Get the Message

The American people are shouting so loud at their congress members and Senators, that even some of the most pro-Wall Street congressman are starting to get it.

For example, the Congressional Black Caucus has been hearing so much about how congress is failing to address the crisis of unemployment from their constituents, that the CBC delayed Barney Frank's proposed financial reform.

The House Financial Services Committee received so many phone calls from constituents that it approved the Ron Paul/Alan Grayson bill to audit the Fed and defeated the trojan horse alternate bill written by Mel Watt. Indeed, I have heard from congressional sources that the only calls to support the Watt alternate bill were from the Fed itself. And see this.

The Committee also approved Congressman Grayson's bill to rein in foreign currency swaps.

Both Geithner and Summers are coming under increasing pressure to resign due to their being in bed with Wall Street.

There were a lot of Democrats who were "upset and nervous with" the handling of the economy by the administration.

"It is pretty embarrassing for a Democratic administration and a Democratic Congress to be identified with total attention to Wall Street and nothing for Main Street and jobs," he said. "There are a lot of Democrats who... want to see something more effective done to create employment."

DeFazio insisted that President Obama and, by extension, the Democratic Party were hampered by Geithner's policies for economic recovery. He pointed to the inability of the administration to spur small business lending and the lack of effective TARP oversight as particularly egregious examples of mismanagement. More than anything else, the Oregon Democrat deemed it untenable for the president to continue employing his current economic team given the taint of Wall Street that clings to many of those advisers.

"I have had a number of people say to me, 'I feel the same way you do but I'm not going to say it.' People are worried it will rub off on the president who still enjoys popularity," he said. "I tell them I still support the president. I just think he is being poorly served by his economic team."

"The truth of the matter," DeFazio added, "is that we have not changed the way the money is being used. It is not being used for the purpose it was supposed to be used for. We are not creating jobs and we have not aggressively taken on the culture of Wall Street"...

One of his chief concerns was that the president appeared enamored with the lords of finance. "The administration has, thus far, not threaded the needle here," he said. "They have taken care of Wall Street but not the rest of the country."

Are the American people are finally starting to awaken?

We've been down this road beforeShown worse devils to the door

Throw off our chains of slaveryNow is the time to set ourselves freeAnd reclaim our liberty ...They bought the politicians and the newsThey've got all the weapons (which they like to use)

But they are few and we're billions strongWe are the giant ... been sleeping for too long Time to wake up and sing our victory song- The Voice

The elites hate to acknowledge it, but when large numbers of ordinary people are moved to action, it changes the narrow political world where the elites call the shots. Inside accounts reveal the extent to which Johnson and Nixon’s conduct of the Vietnam War was constrained by the huge anti-war movement. It was the civil rights movement, not compelling arguments, that convinced members of Congress to end legal racial discrimination.- PhD Economist Dean Baker

Anger is a great force. If you control it, it can be transmuted into a power which can move the whole world.- SivanandaThe power of an aroused public is unbeatable.- Dr. Helen Caldicott

The most powerful weapon on earth is the human soul on fire.-Ferdinand FochIn times of danger large groups rise to the highest pitch of enthusiasm, courage and sacrifice . . . Mankind will be refashioned and history rewritten when this law is understood and obeyed.-Helen Keller

You let one ant stand up to us - then they all might stand up. Those puny little ants outnumber us a 100 to one. And if they ever figure that out, there goes our way of life.- Hopper (a grasshopper who is the leader of the gang of thugs who are stealing from the other bugs, speaking to fellow grasshoppers in the Disney/Pixar movie A Bug's Life)

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